Problem Set 1Sol - 1 ECONOMICS 100 PROBLEM SET #1...

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1 ECONOMICS 100 PROBLEM SET #1 (Production Possibilities; Supply and Demand) Notes on the Solutions 1. Production Possibilities An economy produces only wheat and cloth. Land and labour are the only factors of production. Through the use of diagrams, show how the original production possibility curve would change (if at all), if each of the following independent events were to occur. Give a short explanation. PPF could be linear or bowed out. Linear selected below for ease of computer diagrams. a) Mandatory retirement is forbidden. Forbidding retirement presumably adds to the supply of labour available to the economy. Additional labour is assumed to be productive in both industries. Shifts PPF out. In ECO 100, we don’t worry about whether this shift out is parallel. W PPC 2 PPC 1 C Perverse answer: People reaching retirement age are actually becoming unproductive and letting them work on for more years actually reduces the productive capacity of the economy, as others have to fix up their goofs. Once they retire, the goof rate goes down! So mandatory retirement actually causes the PPF to shift out (as compared to when people were allowed to work into dotage). Put the other way, forbidding mandatory retirement causes the PPF to shift in!! <On a test or exam, you would not be expected to explore all possible answers including “perverse” ones, unless the question explicitly asked you to do so. A good rule of thumb in ECO 100 is to stick with the obvious solution!>
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2 b) An innovation (technological improvement) occurs in the cloth industry. Assuming that the technical change impacts only on cloth, then the PPF intercept on the C axis rises, but the W intercept remains the same. W PPC 2 PPC 1 C c) A large number of workers in the cloth industry are laid off. The maximum potential of the economy is not impacted by a layoff. So the PPF remains the same. Production shifts from being on the PPF at A to inside the PPF at B. Until these idle resources get re-employed, we are inside the PPF. W
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This note was uploaded on 01/16/2011 for the course ECO 100 taught by Professor Indart during the Fall '08 term at University of Toronto- Toronto.

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Problem Set 1Sol - 1 ECONOMICS 100 PROBLEM SET #1...

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